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21 Sep 2009

This week: How Cello is starting to play to a new strategic tune, why Just Car Clinic is no car crash dummy, and why the Glenlivet exploration well now looks less whisky

Bglobal plc (BGBL 42.75p / £32.61m)
We have reported good news many times in the past few months for this market-leading provider of smart metering services to the UK energy market. And since we last wrote on the share, it has doubled. Last week Bglobal announced two new deals. First, an agreement to deliver smart metering services to Gazprom to supply and install its latest generation of smart electricity meters to its growing base of UK business customers; and, second, an agreement with Superdrug to install smart meters at all of its UK stores, totalling more than 900 sites. Although the share price has done well, we believe there is much more good news that could come from this company.

Cello Group (CLL, 38.5p / £22.5m)
Cello is less a case of fiddling while Rome burns and more a case of adjusting strategically while the recession bites. In the six months to 30 June 2009, the direct marketing and market research group saw operating income decline by 10.9 per cent. But careful financial management saw staff costs reduce by 8.1 per cent, leading to positive adjusted earnings per share of 2.81p. The group now plans to increase its focus on marketing services to the healthcare and ‘well-being’ areas, which means not just pharmaceutical companies, but health and beauty retailers and public sector health campaigns. Finance director Mark Bentley told Hybridan that this strategic shift provides employees with a clear direction. But another key benefit is that these areas are typically less vulnerable to macroeconomic pressures. Despite the tough economic climate, Cello looks to be astutely reducing its financial risk.
Crimson Tide (TIDE, 1.48p / £4.91m)
We wrote on Crimson Tide a few weeks ago following its landmark full-year results, which trailed month-on-month positive cash flow this year. This one slipped through the net in last week’s Small Cap Wrap. We see the company evolving quickly and part of this evolution has been the recently announced disposal of the group’s Time and Attendance business in Ireland for €105,000. This leaves the group focused on its core offering of mobile data solutions for the facilities management, healthcare and finance and insurance sectors. One to watch.
Deltex Medical Group (DEMG, 9.75p / £11.26m)
Last week, the leader in oesophageal monitoring announced the results of a new survey into doctors’ technology preferences for monitoring cardiac output in intensive care. The survey confirmed the trend towards less invasive methods of monitoring cardiac output and, of these; Deltex’s CardioQ-ODM was the first choice of technology among 55 per cent of respondents. Deltex’s technology has long been appreciated in the UK, but this survey was conducted in Italy, which suggests its technology is exporting well. We like this medtech share and understand that no one else had a product nearly as precise or comprehensive in its monitoring function as Deltex. As always with medical technology, it is a question of convincing the opinion leaders and changing habits, which the company seems to be doing quite nicely.
Faroe Petroleum (FPM, 122.5p / £128.84m)
Another one that has more than doubled since we last wrote on it – and which has reported great news repeatedly since we began coverage – is Faroe Petroleum, the oil and gas company focusing on exploration and appraisal in the North Sea and Norway. Last week it announced the discovery of gas at the Glenlivet exploration well, West of Shetland, 10 per cent-owned by Faroe. An immediate appraisal of the discovery is being considered with the planning of a potential sidetrack well ongoing. The Glenlivet well is the first of a firm fivewell Atlantic Margin exploration drilling programme that Faroe is undertaking, the second of which is scheduled to commence drilling by the end of September 2009. We continue to maintain that Faroe has far to go in delivering value and share price appreciation.
Goldplat (GDP, 10.5p / £11.73m)
The African precious metals recovery and mining company has delivered a shiny set of results for the year ended 30 June. Production from the South African and Ghanaian gold recovery plants increased by 9 per cent, to 21,068 ounces, at the same time as contained gold in stockpiles for processing increased to 88,000 ounces. Revenue rose 44 per cent to £11.1m resulting in a net pre-tax profit after exceptionals of £1.9m plus a capital gain of £420,000 from the sale of a 15 per cent stake in the company’s South African operations. Goldplat has increased capacity and streamlined operations with the purpose of lowering production costs per ounce. As we reported earlier, the company recently purchased the remaining 50 per cent of Kilimapsea Gold that it does not currently own for $2.7m from its former joint venture partner. An aggressive exploration and development programme has been implemented at the Lolgorien gold project situated in southwest Kenya, in the historically productive Migori Archaean Greenstone Belt. The current plant is capable of a production of 3,000 ounces of gold a year. Unfortunately, the company is still waiting for the Kenyan authorities to convert the exploration licence to a mining licence, which has delayed commercial production by several months. Nevertheless, we believe Goldplat is pursuing a sound strategy of advancing the junior mining business by taking advantage of their experience with small-scale operations in historical gold mining areas.
Intelligent Environment Group (IEN, 11.25p / £17.93m)
Financial transactions are no longer exclusively provided by financial services companies, but by retailers as well. Intelligent Environment (IE) has so far sold its software to banks and savings institutions who want to offer their products online in order to reduce costs and provide a better customer service. Proving that the company is just as capable in dealing with non-financial customers as with banks, IE has won a three-year contract with Home Retail Group, which will implement IE’s system. This will enable Argos and Homebase store card customers to receive comprehensive electronic card statements and the Home Retail Group with much improved knowledge of their customer base. The deal further solidifies IE’s transactional revenue model.
Just Car Clinic (JCR 52.5p / £7.16m)
Just Car Clinics is the sort of stock we love at Hybridan. It combines decent revenues, a healthy bottom line, a strong management team, a sensible balance sheet and a share price that looks good value. JCR is the second largest independent chain of accident repair centres in the UK and undertakes collision damage repairs to cars, vans and motorcycles. It operates from locations throughout Yorkshire, Lincolnshire, the Midlands and northeast of England. The company has reported its first-half numbers and booked a profit of £563,000 (£647,000 last time) on broadly flat revenues of £21m, albeit down 4% on a like-for-like basis. Just Car Clinic reported that mandatory vehicle insurance meant the accident repair market is insulated from the wider economic climate but, against this, reduced road usage has resulted in fewer collisions. And this, along with reluctance by retail customers to incur insurance excess payments, has adversely affected volumes across the industry. The company kept a tight rein on costs, and cash generated from operations remained strong, at £1.2m. This allowed debt to be repaid down from £1.8m to £1.3m. Further acquisitions remain on the cards, justifying our view that this stock is just the ticket.

Minster Pharmaceuticals (MPM, 5.125p / £3.02m)
The rumours of the death of Tonabersat may have been greatly exaggerated. Earlier this year, Minster’s Phase IIb study of Tonabersat in migraine prevention did not meet its primary endpoint. However, an earlier but smaller Phase II trial of Tonabersat in migraine with aura had shown a significant preventive effect and these results were recently published in the Lancet Neurology. Aura is a symptom experienced before a migraine or seizure and is effectively a field of luminous multicolored lights that a patient may describe as flashing lights that he or she sees. Following up on these results, the lead investigator professor Jes Olesen, who is one of the world’s leading headache specialists, last week presented a paper at the International Headache Society congress concluding that Tonabersat has the ability to inhibit cortical spreading depression which is the cause of auras. Furthermore, at the same congress, Dr Paul Durham of Missouri State University presented a poster explaining the mechanism of action of Tonabersat concluding that the drug should be useful in preventing migraine attacks associated with sensitisation. These positive findings suggest that Minster may be able to find a partner who wants to develop the compound further. In that case Minster, which currently trades at half of net cash value, is seriously undervalued. Plant Health Care (PHC, 277.5p / £143.18m) last week announced its interim results for the six months ended 30 June 2009. It reported a wider first-half loss following lower sales: $3.86m from $3.34m a year earlier, on revenue down 30 per cent, at $5.51m. Most significantly for the period, it raised £10.5m in a placing. Plant Health Care management seem confident in their current partnerships and comment that they believe there are more announcements to come on new deals. We believe, however, that Plant Health Care has had a good run and for value, and prefer Plant Impact, (PIM 26.75p / £8.41m)* in this space. Our view is that Plant Impact has some potentially disruptive technologies that could contribute to easing emerging agricultural sustainability issues and that have access to the large and growing fertiliser & agro-chemical markets. It should also be remembered that Plant Impact has raised a fraction of the monies that Plant Health Care has over the years and yet has a full stable of products as well as its share of agreements with industry leading heavyweight companies. Any weakness in the company’s share price should only be seen as a buying opportunity.
TyraTech (TYR 17.5p / £4.01m)
Another company in this space, TyraTech, also had its interims results ending 30 June 2009 last week. This novel eco-technology company for human, animal and environmental health has had a rough ride in the last three months. Net revenue of $3.3m is some $886,000 more than the first half of 2008, largely as a result of expanding its relationship with Terminix and having signed three other sales contracts. Costs have been hugely reduced, so that the company’s loss from operations is only $6.2m, as opposed to $8.9m last year. This has been done by establishing a more streamlined administrative function; solidifying trade channels and having the directors take a 10 per cent salary cut. However, the company is shedding cash at a fast rate, which needs to be addressed, although it mentioned that it was in talks with a strategic investor and management say that it has adequate cash to maintain operations for the second half of the year and into 2010. We remain on the sidelines with this one and prefer to watch and wait.

WIN Group (WNN, 64p / £6.5m)
WIN, which provides a range of specialist mobile-phone-related services for businesses such as mobile operators and internet portals, saw revenues broadly flat in the half year to 30 June, at £19.7m. But underlying EPS fell by 35.8 per cent, as WIN increased its sales force and headcount as it strives for continued growth. And indeed the group has been making clever strategic moves into ‘managed services’, in which WIN becomes more integrated into client operations and is able to secure higher margins. Significantly, managed services made up 62 per cent of gross profits in this half, up from 55 per cent in the first half of 2008; and finance director Lance Moir told Hybridan he’d like to see this figure rise to 67 per cent going forward. Furthermore, the group has yet to fully exploit the UK mobile phone operator market, and sees opportunities to expand into Eastern Europe. Despite its relatively small size and a difficult economy, WIN is continuing to pay a dividend and continues to be profitable. Oh, and it is also debt-free. In this case, then, size is clearly not everything.
Zenergy (Zen 125.5p / £66.35m)
Zenergy, the superconductor energy technology company, announced its results for its half year to 30 June. The period was busy for the company, which installed its first superconductor Fault Current Limiter in California, received a commercial contract for a Limiter for The Consolidated Edison Company of New York, received additional funding from the US Dept of Energy for development of a low cost “2G” superconductor wire, and secured a commercial contract from RWE. Conversely, however, revenues took a backward step, with Zenergy booking only €214,000 against €1m in the same period last year. And, with a bottom line loss of €5m, it’s reassuring to note that €10m of new equity was raised in the period to fund the company’s ongoing cash burn. The order book does look to be picking up, however, and stood at €2.3m in June with further new orders received since then. The science behind the company’s technology is compelling and it is beginning to gain traction in its markets. But, as with so many promising tech stories, whether the company has the zenergy to last the distance remains to be seen.

* Corporate Clients of Hybridan LLP

*Corporate Clients of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week. Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies. Our review is not intended to constitute research and is not to be taken as investment advice.

10 Sep 2009

This week: A sea energy company turns the tide, a sound improvement from a radio business and lots of good news for Synairgen

African Copper (ACU 8.50p/£59.7m)
We try and bring you, dear reader, small cap stories of companies whose market capitalisations are less than £50m. However, sometimes a news story is so good and the share price rise so strong that what started out within our universe of coverage soon shoots through it. African Copper is a case in point, with a 20 per cent share price jump. It announced that its copper mine based in Botswana has recommenced operations after a period in care and maintenance following the collapse and now rebound of the price of copper. The teething problems encountered during the re-start of the plant were quickly identified and remedied and management now believe the operation is well positioned to advance to full production through the coming quarters. We know many of our most respected investors maintain a bullish stance on commodity prices generally and this one in particular looks copper bottomed.

Crimson Tide (TIDE 1.48p/£4.91m)
The ”no guts no glory” oil and gas exploration company, which looks for opportunities where others don’t dare, is raising £3.7n in a placing to continue its development programmes in the country of Georgia. The people behind Frontera are no chickens and entities controlled by some of the board directors have agreed to underwrite the whole issue at a significant premium. The private placement consists of 35.8m units priced at 10.3p each, which is comprised of one common share and one common share purchase warrant exercisable for two years at 15p per common share. The proceeds will be used to facilitate efforts that will boost cost-effective, short-term production and cash flow and thereafter larger-scale production and further exploration of the company‟s prospects.Herencia Resources plc (HER 0.62p/£3.04m)
The prospects for Herencia, the junior exploration company that is developing the Paguanta zinc-lead-silver project in northern Chile, look a lot more promising than they did six months ago, thanks to improving commodity prices and a determined management team. The company has been granted the remaining 10 of 14 exploitation tenements, covering a total of 39 square kilometres, enabling it to move towards the project development phase. The company‟s share price rose 30 per cent on the news, which follows an earlier solution to worries about a share overhang. Building on last year‟s achievements that included an upgrade of the mineral resource, a completed scoping study and confirmation of high ore grades at depth, Herencia now needs to test the potential and move the project forward towards a feasibility study. This will require more capital, but with the company‟s situation improving, this should not be too hard to overcome.

Immedia Group (IME 7.75p/£1.13m)
This market tiddler is the UK‟s leading provider of live radio stations used in retail locations. Go into any Ikea or branch of HSBC and the soothing sounds of HSBC Live! and IKEA Live! will have been produced by Immedia. The company is steeped in radio, being headed by former Radio 1 DJ, Bruno Brookes. In its half-year results, published this week, it reported a reduced loss of £41,000 (£115,000 last year) on turnover up to £1.7m (from £1.6m). The group has a decent roster of retailers signed up to its subscription services, including Game, Lloyds Pharmacies and most recently Top Shop and Top Man. Interestingly, Immedia also offers a product called ‘RadioVision’, which combines in-store radio with synchronised bespoke video content. Through this technology, radio works in unison with plasma and LCD screens to engage consumers and staff. The specially consolidated video content can be instantly triggered by presenters when explaining products and services. Immedia provides the radio service together with bespoke audio and visual content, all hardware, network delivery and maintenance support for the store network. While the microcap media space is littered with smart ideas that never take off, Immedia‟s tight control of costs, a balance sheet with £700,000 cash and a compelling product offering mean this could be a winner. Nice one Bruno.Monitise (MONI 15.75p / £65.1m)
If Monitise has not quite started to, erm, monetise its technology, it has certainly started to commercialise it. The group provides an end-to-end solution enabling banks and their customers to undertake banking transactions via mobile phones, and results for the year to 30 June 2009 saw revenues rise by 80 per cent, to £2.7m, as the group increased its professional services fees and licence revenue. But losses were a heady £12m (2008: £12.8m). This should, however, be seen in context. In a meeting with Hybridan, chief financial officer Tom Spurgeon said the group‟s strategy is to secure revenues on a per consumer basis, rather than from licensing its platform. As such, growth will be driven by the increasing take-up of mobile banking services. And this suggests there could plenty of dough to Monitise as the group looks poised to take a slice of a cake that is rising rapidly. Indeed, it could take several slices, as it is targeting not just the UK market (where 60 per cent of the retail banking market is on its platform) but the US, Asia and Africa. Small wonder, then, that the group recently raised £17.9m of equity – and some might call that smart money.

Pixel Interactive Media (PIXL 16p / £6.4m)
Given the impact of the downturn on display advertising – online and offline – Pixel‟s 1.5 per cent rise in revenue in the six months to 30 June, to $9.3m, is creditable. The group provides online advertising services and an online ad network in several regions of Asia. And growth would have been significantly higher had its business in Hong Kong (which accounts for 60 per cent of revenues) not benefited from the Beijing Olympics in the first half of 2008. Pixel Pdid, however, register a loss per share of 0.35p (against positive earnings per share of 2.58p in the first half of 2008) as it invested in staff for its expansion plans. But rises in turnover of 58 per cent in Singapore and 27 per cent in Malaysia suggest the wind has not gone out of this particular growth story. Chief executive Kevin Huang told Hybridan he would now focus on increasing „depth‟ in its existing markets, rather than seeking greater „breadth‟ in new markets. And with $4.4m net cash on the balance sheet at 30 June, it does not lack the firepower to pursue further growth. Indeed, the group announced last week that it would buyback up to 4m of its own shares. This was received very positively by the markets, and Pixel‟s share price rose by 45 per cent as a result.PLUS Markets Group (PMK 7.75p/£24.5m)
PLUS operates the eponymous market in London and this week has announced a number of initiatives to steal market share from the London Stock Exchange. First, as part of the litigation settlement with the LSE since 1 September, all AIM stocks are now automatically traded on PLUS (previously a company had to apply to have its shares PLUS-traded). Second, PLUS announced this week a liquidity scheme under which PLUS will share with market makers the revenues it receives from data sales. And third, and possibly most significantly, a placing of shares to Amara Dhari Investments, a special purpose vehicle set up by a syndicate of investors from the Middle East to raise up to £5.5m. PLUS believes the placing is the first stage of a wider mutual commercial venture with Amara Dhari, with the aim of promoting PLUS in the Middle East and introducing business to PLUS, including but not limited to issuers on PLUS’s primary markets and trading members. Our experience is that PLUS is able to attract much of the liquidity in smaller, less liquid AIM stocks and these initiatives look sensible. The markets reacted well (shares up about 10 per cent), which is also a plus.

Ramco (ROS 51.5p/£26.28m)*
This week has proved to be an important one for the British energy investment company Ramco, which made the strategic decision to move away from oil and gas interests and to concentrate solely on its offshore wind operations. The Aim-listed company‟s pioneering move makes it the stock market‟s first company to purely focus on offshore wind, and it has subsequently moved to rename itself SeaEnergy. Ramco, which announced a successful fundraise of £7.5m from Landstead this week, can also expect the strategic change to open doors to future investment from green-focused funds that up to now have tended to steer clear of investment due to the oil and gas focus of the group. With the government predicting a „new North Sea‟ investment boom, which they have incentivised by adjusting the current „Renewable Obligations‟ subsidy system , Ramco could be sitting on the crest of a large wave of future offshore wind investment. Executive chairman Stephen Remp said „the offshore wind opportunity is truly enormous, with over £130 billion of investment envisaged over the next 11 years through the Scottish and UK Offshore Rounds‟. Exciting times lie ahead for the Aberdeen based offshore wind boys.

Sareum (SAR 0.3p/£2.62m)*
Sareum, the specialist cancer drug discovery company, announced this week the successful fundraising of £315,000 by way of a placing of 157,500,000 new ordinary shares of 0.025p each in the capital of the Company at 0.2p per share. Following the admission of these shares onto the AIM market, the company has a total of 975,598,000 shares in issue. Tim Mitchell, founder and chief executive, said: „We are pleased to have been able to raise these funds despite the difficult economic climate. The placing will provide additional funds to progress our pipeline of cancer research programmes.‟ This cash injection should indeed help progress Sareum‟s cancer research programme and will also offer extra general working capital for the company.Synairgen (SNG 18.5 pence / £11.05m)
The Aim-listed respiratory drug discovery and development company had a run of announcements last week. First, its preliminary results for the year ended 30 June 2009. In June it completed a fundraise of £6.4m at 17p per share, only a 4 per cent discount to the mid price, reflecting the demand and confidence in this biotech stock, to finance two planned Phase II proof-of-concept studies. Not that numbers are particularly of interest when looking at biotechs (aside from cash, that is, which this one is awash with), but the post-tax loss for the year was £2.5m and cash at period end of £7.9m. More significant than the numbers, in the period in question, the lead inhaled Interferon-beta programme entered into its second Phase I study and will show final results in the late autumn. Also on 4 September, Synairgen announced that the patent for inhaled interferon beta to treat rhinovirus infections in asthma and COPD (Chronic Obstructive Pulmonary Disease) – that‟s smoker‟s cough to me and you – has been granted in the US, which is crucial as Synairgen enters the commercial phase of its compounds. Synairgen’s compounds are potentially going into truly enormous markets. There are around 23m asthmatics in the US and the cost of emergency department visits and inpatient care in relation to asthma in the US is $4.7bn. COPD includes chronic bronchitis and emphysema and the economic cost to the US of COPD is a whopping $42.6bn a year. Synairgen is aiming to tackle the cold and flu viruses that make asthmatics and COPD sufferers‟ lives particularly miserable and which cost health systems a huge amount. Adults get an average of two to four colds per year, young children suffer from an average of six to eight colds per year, and these often rhinovirus infections are the major cause of asthma exacerbations, accounting for 50-80 per cent of all such attacks in both children and adults. Around 80-85 per cent of COPD exacerbations are associated with viral or bacterial respiratory tract infections. The final piece of news for this stock last week was the appointment of Phillip David Monk as chief scientific officer and Paul Hugh Anthony Clegg as a non-executive director to the board. Synairgen has tracked up a little since these announcements, but the good stuff is yet to come: results from a safety study in the fourth quarter of this year, the start of various virus trials, ongoing patent news, start of pII proof of concept trials and the ensuing updates and results, pilot studies, and of course an outlicensing deal could always be round the corner! We recently met management and were impressed. Prepare to be blown away by news of this one, which we don‟t think will catch a cold anytime soon.

*A corporate client of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week. Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies.

03 Sep 2009

This week: Cashbox makes a cashpoint, EnCore continues to perform and there’s gold in H&T’s profits

Cashbox (CBOX, 3.5 p / £5.4m)
Cashbox has just got a little bigger. It has been awarded a contract to manage 220 ATMs installed in the Orchard Pubs and Dining estate of leisure retailers. This brings the number of new ATMs in the Cashbox estate to more than 800 in the past three months, taking the total estate to more than 3,000 ATMs (although the focus should be on the transaction numbers rather than the absolute number of machines). With this level of growth and the increasing use of cash by consumers we expect current trading to be strong.Claimar Care Group (CCGP, 37.75p / £18.9m)
We wrote a few weeks ago on the UK’s leading provider of domiciliary and complex care to individuals living in their own homes. The shares have risen 18 per cent since then. Claimar has reached agreement on the terms of a unanimously recommended cash offer to be made by Housing 21 to acquire the entire issued ordinary share capital of Claimar Care for 39p per share, payable in cash. This is three times the share price before the initial announcement. At 39p, Housing 21, the national provider of older people’s services, is paying £39m including net debt, amounting to 0.7x sales or 8.8x EBIT. It would appear that Claimar has found the right home and this doesn’t look to be a bad deal for Claimar shareholders.EnCore Oil (EO., 14.75p / £45m)
EnCore has now completed the sale of its 15 per cent interest in the Breagh gas discovery in the North Sea. As a result, the company’s core asset is a £47m net cash holding. With a market cap of £45m, you would think that there is nothing else going on. Not so! There is plenty of upside: first gas is now expected from the Ceres field in Q4 2009. Q1 2010 could well also see the drilling for oil at the onshore Markwells Wood property, as well as the drilling of an appraisal well at the Cladhan light oil discovery. In 2010 we can expect to see drilling of a test well at Catcher and at the Bennett gas prospect, another appraisal well at the Cobra discovery and at the Biscathorpe structure. Furthermore, the board will seek approval at the upcoming AGM for a share buyback programme, in order to leverage the impact of the expected success from its current projects. We think the market is undervaluing the company’s remaining assets and, even more so, management’s proven record and ability in creating value with a consistent asset management strategy.H&T Group (HAT, 270.5p / £95.59m)
The country’s leading pawnbroker, H&T, which specialises in everything from secondhand jewellery sales to payday advances, saw profits rise 48 per cent in the first half. Pre-tax profit increased to £7.7m in the six months ended 30 June, compared with £5.2m previously; and turnover was £30.8m, as against £24.1m last time around. Small wonder, then, that the company increased its interim dividend from 2p to 2.5p. With the strong increase in profits having been primarily driven by the strong price of gold, its enlarged estate and an increased public demand for capital, H&T said it expects full-year results to be towards the top end of current market expectations. Further good news came in the form of the successful agreement of an enlarged four-year debt facility, taking its original £35m facility up to a sizeable £50m. The company plans to use the increased funding to continue with its expansion plan – further store openings are planned across the UK – and thus help drive profits going forwards. Chief executive John Nichols said: ‘Given the current credit environment, this demonstrates confidence in H&T’s abilities to generate returns and secure the necessary funding to continue growing the business.’ Perhaps not everyone has felt the credit crunch strain.

Hutchison China Meditech (HCM, 120.5p / £61.7m)
This low-risk, high-reward specialty pharma is up 43 per cent since we first covered it a few weeks ago. And last week it announced that 14 of its main drugs have been included in the list of 307 essential drugs on the New National Essential Medicines List, issued by the Ministry of Health in China. Priority has to be given to these Essential Drugs by healthcare institutions, which represent more than 80 per cent of the HCM division’s sales of prescription and over-thecounter drugs. The She Xiang Bao Xin pill, a prescription drug for cardiovascular disease, is protected by a certificate issued by the Ministry of Science and Technology and State Secrecy Bureau until August 2010. Management believes this exclusivity protection will be extended in 2010 and that it will continue to be the sole supplier of this highly successful pill in the Chinese market. The China healthcare market maintains its rapid growth and its China healthcare division did well, according to the company’s recent results. Christian Hogg, chief executive of Chi-Med, said: ‘Since our 2006 flotation, our China Healthcare Division has recorded compound annual organic growth of 28 per cent, as well as improving operating profit margins from 0 percent in 2005 to 18 per cent in the first half of 2009.” This is no high-risk biotech and in itself offers a diverse mix of activities to give exposure to drug development and specialty pharma, with a consumer division to boot. We also like the geographic mix, with some, but not exclusive, exposure to China.Landkom (LKI, 12.5p / £30m)
As if bringing in the harvest for our favourite Ukrainian crop grower wasn’t enough, the company has announced its chief executive has stepped down and Landkom has announced it is in preliminary discussions regarding a potential merger. These goings-on down at the farm seem a bit of a shame, as they’ve distracted the market from a decent harvest this year of 39,000 tonnes of oilseed rape. Still, probably only a stock for those well versed in Ukrainian oil seed rape farming.Oilex (OEX, 12.75p / £22.45m)
This oil and gas producer rose more than 80 per cent since it successfully completed the farm out for JPDA (Joint Petroleum Development Area) off shore East Timor with Japan Energy E&P JPDA, a subsidiary of Japan Energy Corporation. The stock has paused for breath in the past few weeks. Last week, Oilex announced that all conditions precedent for the farm out have now been satisfied. Oilex is farming down 15 per cent of its 25 per cent interest in the offshore production sharing contract in JPDA. Oilex retains a 10 per cent interest in this highly prospective offshore block, but now has been refunded for its past costs and has the funding for its first two wells. Planning for the initial, two-well drilling program is well advanced and Oilex is currently in negotiation with a preferred contractor to secure a rig to drill the two prospects. These prospects have estimated mean prospective resources of 285m barrels of oil. Oilex is likely to commence drilling in the fourth quarter of 2009. We believe this oil and gas stock is still one to keep an eye on, despite pausing for breath over the past few weeks.Pilat Media (PGB, 25.25p / £14.95m)
Pilat, which supplies business management software to the broadcast industry, is seeing its own business move back in the right direction. Following a loss-making year in 2008, the company, whose clients include BSkyB, Fox and the BBC, made a small adjusted profit of £36,000 in the six months to 30 June. And there was also an uptick in revenues, which rose 1.8 per cent in the period and 7.9 per cent in the second quarter. Management was unsurprisingly upbeat, particularly given that Pilat typically makes almost all of its profits in the fourth quarter of the financial year. And, significantly, recurring revenues from existing contracts remain at a high level and management said the rise in demand from existing clients alone should help it match, and perhaps exceed, 2008 revenues. And with an improved sales pipeline, a reduction in costs and no debt, Pilat could be set to fly high once more.Quarto (QRT, 98p / £18.2m)
Book publishing is a relatively defensive part of the media sector, as it doesn’t rely on revenues from advertising. Even so, it is not immune to the economic downturn. And this is reflected in the results of Quarto for the six months to 30 June, in which revenue declined by 5 per cent, to £41.8m. This was, erm, driven by a poor performance in automotive and home improvement titles, unsurprising given the tough car and property markets, and a difficult climate in the US. The group also has a heady net debt figure of £59.9m. But Quarto has plenty of asset backing to offset this, in terms of its ownership of book titles and licensing rights. In addition, it has carved out an attractive niche for itself as a producer of illustrated books, many of which are created for other book publishers. This allows it to leverage its illustrated publishing skills, such as using designers, design software, and knowing how to seamlessly link images with text, which traditional book publishers typically lack. As such, Quarto has plenty of skills to draw on.

*A corporate client of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week. Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies.

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